I spent much of last evening getting familiar with the 2200 page report, as well as reading and absorbing the reaction from various sources. Here's what's important:
- We would never have known any of these details if Lehman had not been allowed to fail. Geithner and Paulson miscalculated. Bankruptcy brought transparency. At a minimum, Geithner and Fuld will face intense scrutiny from civil lawyers, prosecutors and Congress.
- Repo 105 transactions are likely used elsewhere on Wall Street.
- Dick Fuld, Ernst & Young, Erin Callan & Ian Lowitt might be in some legal trouble.
- Tim Geithner and the NY Fed deserve punishment and subpoenas.
- Dick Fuld, Henry Paulson, Tim Geithner, Ben Bernanke, Ian Lowitt and Erin Callan are liars.
- JPMorgan and Citigroup contributed to Lehman's collapse with collateral calls.
- The Federal Reserve should never be allowed to regulate or oversee anything again. Based on what we know now, they couldn't oversee their own ass.
- What happens in the shadow banking system stays in the shadows except for occasional reports. How did it take 18 months for this information to be made public?
- Every single solitary bank and financial institution lies about their assets.
- FASB 157 and mark-to-market accounting was gutted last year. Completely unrelated to Repo 105s, there are valuation lies on the books EVERYWHERE.
- AUDIT THE FED IMMEDIATELY
Every single link below should be read, except for the 2200 page report. Each was included for a specific reason -- usually the reporting angle. Please post related links in comments below that you would like me to see and consider adding to the story.
The examiner, Anton R. Valukas, refers repeatedly to “Repo 105,” a name for a set of accounting tactics originated by Lehman that temporarily shuffled about $50 billion off the firm’s balance sheet for the two fiscal quarters before it collapsed.
Lehman’s use of Repo 105 — hidden from the firm’s board but not its auditors at Ernst & Young — helped the investment bank look less indebted than it really was.
More from the examiner’s report:
Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio. According to former Global Financial Controller Martin Kelly, a careful review of Lehman’s Forms 10‐K and 10‐Q would not reveal Lehman’s use of Repo 105 transactions. Lehman failed to disclose its Repo 105 practice even though Kelly believed “that the only purpose or motive for the transactions was reduction in balance sheet”; felt that “there was no substance to the transactions”; and expressed concerns with Lehman’s Repo 105 program to two consecutive Lehman Chief Financial Officers – Erin Callan and Ian Lowitt – advising them that the lack of economic substance to Repo 105 transactions meant “reputational risk” to Lehman if the firm’s use of the transactions became known to the public. In addition to its material omissions, Lehman affirmatively misrepresented in its financial statements that the firm treated all repo transactions as financing transactions – i.e., not sales – for financial reporting purposes.
4:14 p.m. | Updated The directors of Lehman did not breach their fiduciary duties in overseeing the firm as it acquired toxic mortgage assets that eventually sank the firm, a court-appointed examiner wrote in a lengthy report published Thursday.
10:26 p.m. | Updated Here’s the list of statements we’ve gotten so far.
From Patricia Hynes, the Allen & Overy lawyer representing Richard S. Fuld Jr.:
The Examiner believes the Lehman estate has a “colorable” claim against Dick Fuld because Lehman did not provide enhanced disclosures about certain financing arranagements called Repo 105 transactions. Mr. Fuld did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment.
Furthermore, the evidence available to the Examiner shows that the Repo 105 transactions were done in accordance with an internal accounting policy, supported by legal opinions and approved by Ernst & Young, Lehman’s independent outside auditor. At no time did Lehman’s senior financial fficers, legal counsel or Ernst & Young raise any concerns about the use of Repo 105 with Mr. Fuld, who throughout his career faithfully and diligently worked in the interests of Lehman and its stakeholders.
From Charles Perkins, a spokesman for Ernst & Young:
Lehman’s bankruptcy, which occurred in September 2008, was the result of a series of unprecedented adverse events in the financial markets. Our last audit of the Company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.
From Bryan Marsal, the current chief executive of Lehman Brothers Holdings and the man supervising the wind-down of the firm’s bankruptcy estate:
We have just received this voluminous report and will carefully evaluate it in the coming weeks to assess how it might help us in our ongoing efforts to advance creditor interests.
From Lewis Liman, a lawyer representing Lehman’s last pre-bankruptcy chief financial officer, Ian Lowitt:
In the three months during which he held the job, Mr. Lowitt worked diligently and faithfully to discharge all of his duties as Lehman’s CFO. Any suggestion that Mr. Lowitt breached his fiduciary duties is baseles
From Danielle Romero-Apsilos, a Citigroup spokeswoman:
Citi is reviewing the Report, which is over 2000 pages long, but notes that, based on its preliminary review, the Examiner has not identified any wrongdoing on Citi’s part.
Original Post: The report, by Anton R. Valukas of the law firm Jenner & Block, found that while Lehman’s directors should have exercised greater caution, they did not cross the line into “gross negligence.” He instead writes: “Lehman was more the consequence than the cause of a deteriorating economic climate.”
We’re reading through the nine-volume report and will report on more of what we find. (We’re also making the first five, nonappendix volumes available after the jump.)
Here’s Mr. Valukas wrote on the Lehman board’s conduct:
The examiner concludes that the conduct of Lehman’s officers, while subject to question in retrospect, falls within the business judgment rule and does not give rise to colorable claims. The examiner concludes that Lehman’s directors did not breach their duty to monitor Lehman’s risks.
“Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.” Lehman used Repo 105 “to reduce balance sheet at the quarter end.” In 2008, Lehman knew that net leverage numbers were critical to the rating agencies and to counterparty confidence. Its ability to deleverage by selling assets was severely limited by the illiquidity and depressed prices of the assets it had accumulated.”